MNI REVIEW: Fed On Hold After Cut Pending Material Change

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Chair Jay Powell on Wednesday made clear

that the U.S. central bank is content to stick with its newly lowered level of

interest rates until developments emerge that prompts a "material reassessment"

of the overall outlook. 

     The Federal Open Market Committee cut its benchmark fed funds rate target

for a third straight time this year to a 1.50% to 1.75% range, saying it would

continue to monitor incoming data as it "assesses the appropriate path of the

target range for the federal funds rate."

     Risks to the outlook have "moved in a positive direction" since September,

Powell told reporters after the two-day FOMC meeting. A promised "phase one"

U.S.-China deal bodes well for business confidence and activity while the risk

of a no-deal Brexit appears to have subsided. 

     "We see the current stance of monetary policy as likely to remain

appropriate as long as incoming information about the economy remains broadly

consistent with our outlook," Powell said. 

     "If developments emerge that causes a material reassessment of our outlook,

we would respond accordingly," he added.

     --INFLATION REMAINS MUTED

     The U.S. economy has proven to be resilient in the face of global

headwinds, Powell said. Consumer spending, which rose 2.9% in the third quarter

on the back of unemployment at a 50-year low, continues to drive growth at a

trend-like pace. The latest GDP report showed housing contributing to growth for

the first time in while, the Fed chair pointed out. Last week, the National

Association of Realtors suggested housing would show a positive contribution to

growth for the first time in 6 quarters.

     While there exists the risk of weakness in manufacturing and exports

bleeding into jobs growth, the Fed's business contacts report that customers are

focused on the strong labor market and rising incomes, Powell said. Jobless

claims, a leading indicator of labor market trends, have also stayed low. 

     On the other hand, rate hikes are not in the offing as long as inflation

remains muted, Powell said. Over the 12 month through August, the headline PCE

price index advanced 1.4% while core prices rose 1.8%.

     Inflation "seems to be settling in below 2%," with already-low inflation

expectations moving sideways. "We're strongly committed to achieve our 2%

objective on a symmetric basis," Powell said.  

     --BALANCE SHEET

     The FOMC offered no new twists on its balance sheet strategy Wednesday,

though Powell alluded to ongoing "forensic work" at the Fed and by private

market players to trace the cause of stress in repo markets in recent weeks. 

     Acute and unexpected liquidity shortages had prompted the Fed to launch an

immediate expansion of its balance sheet this month that it said would continue

through at least the second quarter of 2020.  

     The Fed is committed to keeping banking system reserves at or above the

$1.4 trillion to $1.5 trillion level seen in early September while investigating

why liquidity "didn't seem to flow as one might have expected," causing

short-term lending rates to spike. 

     Loosening capital and liquidity requirements are not on the table, Powell

said, though the Fed would consider "technical" adjustments to rules around

intraday liquidity or daylight overdrafts, for example, to make the liquidity

that we have "move more freely," Powell said. 

     "Those are things we can do without compromising safety, soundness or

financial stability," he said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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